Essential guidance for 2010 financial year end

As part of the Institute's ongoing analysis of themes impacting preparers, auditors and audit committee's as they perform their financial year end roles and professional responsibilities, we have uncovered three new issues as well as confirmed the continued presence of three existing themes in our latest Essential guidance for the 2009-10 financial year end

Despite improvement in Australia's business conditions, and the country avoiding Europe's sovereign debt risks, the challenges for the June 2010 financial year end reporting period continue to be - determining fair value, impairment of assets and going concern.

Looking forward the Institute anticipates increased fair value movement in financial instruments to continue as well as some reversals of impairments from prior years. An increase in the cost of capital, exchange rate fluctuations and more mergers and acquisitions are expected throughout the rest of 2010.

The continued volatility of the Australian dollar and some commodities place great pressure on corporate risk management and hedging strategies. Liquidity remains tight for businesses, therefore, careful forecasting of short to medium term finance needs is critical, as is clearly understanding the terms and conditions with bankers and financers.

It will be extremely interesting to witness how the Australian economy continues its path out of the global economic downturn and whether it can capitalise on its unique position.

International financial regulation – changes are afoot

The global economic downturn clearly showed that macroeconomic policy and prudential supervision were not sufficient to ward off systemic crisis in the international financial system. So the momentum of change has begun – but the $64,000 question remains – What does this mean for Australia, especially when it moved through the economic downturn with greater success than most Westernised countries? Indeed Australia has been praised for its resilience, so what’s next?

Recently, Professor Ian Harper from Access Economics remarked that Australia was at risk of unnecessary change since it appears that the ‘whole class was being punished because two students were caught smoking’! It is with this thought that the Institute engaged with Prof Harper and Access Economics to identify the main global reforms under consideration and how Australian authorities should respond.

The analysis, entitled Reforming international financial regulation identifies three broad responses which Australia could make to the international reform agenda. These range from fully signing up to the reforms, through redefining Australia’s regulatory responsibilities to better reflect global developments, to explicitly repudiating some of the more interventionist proposals.

I am interested to find out about your opinion and whether you agree. For mine I believe we have an opportunity to re-think Australia’s regulatory framework following the findings of the Wallis Committee in 1996-97. New rules may require a new assignment of functions among Australia’s financial regulators. Through this process we must not lose sight of the overall goal which is to keep the financial system more stable and less prone to crisis.

Fit for the future: Challenges for the next generation of Australians

To date the Institute’s thought leadership papers have rightly focussed on forward looking, thought provoking topics that are traditional to the accounting profession (for example, audit, reporting and taxation).

In 2009, the Board of the Institute of Chartered Accountants identified the need to become a greater initiator and contributor into public policy debate on broad business and economic issues which have implications integral to the future success of Australia.

In this regard the Institute sought the expertise of Saul Eslake, one of Australia's leading economists. Saul facilitated a workshop involving the Institute's Leadership and Quality team who were asked to develop six issues believed to represent the key challenges and issues impacting the youth and future generation of leaders in Australia.

The topics were restricted to those collectively agreed to have the most amount of impact on the future financial and global success of Australia and especially relevant to young accountants.

The six issues identified at the workshop included:

• The ongoing resources boom
• An appropriate level of debt
• Home ownership and affordability
• Australia’s infrastructure requirements
• Making the most of Australia’s human resources
• Australia’s role in international governance structures.

These six issues have been presented in a thought leadership paper just released entitled, Fit for the future: Challenges for the next generation of Australians

The paper is designed to start a conversation with today’s and tomorrow’s leaders to work through these issues. I welcome debate on this forum on all or any of the issues presented in the paper.

Audit quality - what is the current status?

On 5 March 2010, the Chairman of the Financial Reporting Council, Mr Jeffrey Lucy AM, released a Treasury consultation paper Audit Quality in Australia: A Strategic Review.

The Treasury paper identifies the key drivers of audit quality in Australia and assesses whether any measures should be taken to address any real or perceived threats to these drivers of audit quality. The paper itself is an extensive piece of work (26 findings in total) and is drawn from a range of sources, in particular the UK Financial Reporting Council's paper on Promoting Audit Quality.

The key findings of the Treasury paper include

• Australia's audit regulation is robust and in line with international best practice
• Australia's audit regulation framework appears to be functioning effectively during the current economic conditions
• ASIC's investigations into recent corporate failures may highlight areas where audits can be generally improved.

These findings align with the views and public messages the Institute has expressed regarding the auditing profession, in particular they mirror those expressed in our thought leadership paper, The benefit of audit - A guide to audit quality.

I'm interested to hear what you think of Treasury's paper and the 26 findings. You can contact us at techsubmissions@charteredaccountants.com.au

When is the ‘early part of the year’?

Reading a recent transcript of a Senate Estimates hearing involving various Government and Coalition Senators as well as Officials from the Department of Treasury makes for quite important, and often outrageously funny, reading. A rather lengthy debate took place about precisely when the ‘early part of the year’ turns into the ‘middle of the year’.

The semantics of the phrases are important because both the Treasurer and Assistant Treasurer have repeatedly said over the last few months that they will release the Henry Tax Review, along with the Government’s initial response to it, in the ‘early part of 2010’.

Senator Barnaby Joyce took charge of this particular point of discussion in the estimate hearing, initiating a rather comical interchange with Assistant Treasurer Senator Nick Sherry about precisely when the public can expect to see the content of the much-anticipated Henry Tax Review.

I encourage you to read the transcript here

What we can conclude from this, other than it would have been difficult to be in the room watching this without breaking out in fits of laughter, is it looks like the Government will release the Henry Tax Review sometime before June 2010.

And how do we know that?

Well, thanks to Senator Joyce’s interrogation, we now know that if the Government releases the Henry Tax Review in June it would be the ‘middle’ of the year and not the ‘early’ part of the year. And of course the Government wouldn’t want to be seen to be contradicting what the Treasurer and Assistant Treasurer have been saying...

We wait with baited breath!

The time is right

The economic outlook for 2010 looks and feels stronger for the first time in the last two years.

But we can see challenges for Australian businesses particularly with the lag effect of the downturn and the increase in interest rates.

These challenges come in all shapes and sizes. Insolvent trading for Directors is one.

Recently ASIC produced a draft guide to highlight to Directors (particularly the SME community) their responsibilities relating to insolvent trading. While the aim of the guide is commendable there are improvements that need to be made. Most importantly ASIC needs to explain its communication strategy on this issue as a guide alone will have minimal benefit.

Of greater impact is a discussion paper released by Minister the Hon Chris Bowen on changes to the current insolvency laws. Oddly this paper seems to suggest that ASIC's guide will have a very short shelf-life.

We applaud the Minister for releasing the paper and wishing to engage in this debate. Some options in the paper relate to a more informal approach to business rescue plans, including greater flexibility to directors liabilities.

Laws on insolvency are finely balanced. Adjusting those laws requires a steady hand - but the goal is worth it! Inevitably attention in this debate will come to those individuals who abuse the laws, such as those involved with phoenix activities.

Dishonest behaviour should not prevent law change, particularly if substantial benefit can be gained.

Let's use this paper on insolvency laws to have a healthy debate on one of Australia's most important regulatory settings.

Sustainable reporting

Happy New Year!

Just before Christmas, I attended the Accounting for Sustainability Forum in London, UK. The forum was attended by representatives from global businesses, audit firms and professional bodies, among others. The forum had considerable alignment with the climate change discussions occurring simultaneously among world leaders in Copenhagen.

It was agreed that we would form a committee that would oversee development of a global ‘integrated reporting’ model. The model would connect the reporting of an organisation’s strategy, risk and financial and sustainability performance.

I found the forum to be an extremely valuable experience, particularly given the Institute’s work on Broad Based Business reporting which not only fits with the breadth of thinking that has been happening with the concept of integrated reporting around the world, but has been at the forefront in terms of thinking and content. Overall there was strong conviction by all at the forum that accountants and the profession need to play a leadership role when it comes to global sustainability challenges.

I also left the forum with some trepidation. One of the biggest challenges to the success of integrated reporting is the current level of global dissatisfaction with financial statements – that is, the issues about the size of statements, complexity, too much detail, etc. I was left thinking: if we add to financial statement reporting with broader integrated focus, will all of this useful and relevant information be left by the wayside because of the current concerns with financial statements?

Where do you see the future of reporting heading?